Credit Beats Stocks In European Financials As Sovereigns Slump

With a quiet start and more violent end to the week, Europe was a technical mess across asset classes. Sovereign bond strength through Thursday seemed much more a story of a missing CDS market (Monday and Tuesday) and basis traders into the end of the week than any underlying confidence. As Spain's and Italy's basis (the spread between CDS and bonds) pushed back up and over zero so sure enough Friday saw their bonds underperforming. Further banking system bailout fears weighing on debt concerns and the contagion to Italy were evident as Italy and Spain gavce up most of the week's gains into the close. Notably France and Austria were significantly wider on the week (burden-sharing). The bailout hopes spureed significant outperformance in European financial credit spreads - both relative to their stocks and the broad credit market overall. The long credit, short stock trade played out as the capital structure effects of any banking bailout were figured into dilution or further encumbrance of whatever equity value is deemed left. Swiss 2Y rates plunged under -30bps today and EURUSD weakened notably (almost roundtripping the week's strength) as clearly the seeming positives of the word 'bailout' are beginning to sink into the reality of what more debt, more encumbrance, and more stigma means for banks and sovereigns now more and more closely tied thanks to LTRO.

Major underperformance by European bank stocks relative to credit...

as senior and sub financial credit soared relative to IG and XOver credit and stocks broadly...

but the burden sharing and guarantees were not lost on traders who marked down Italy and Spain's sovereign bonds notably today...

helped by technicals from CDS-bond basis traders taking profits...

But as is painfully clear from EURUSD's slide and the crash in Swiss 2Y rates, all is not well in the euro-zone...

Comments

[Ahmeexnal]

german sheeple going bankrkupt in record numbers:

http://www.thelocal.de/national/20120608-43043.html

The number of men over 60 filing for bankruptcy rose by 5.9 percent in the first quarter of this year compared to the first quarter of last year. This has been put down to dropping pension levels and the lower wages.

But the most dramatic figure came from the other end of the age scale - the number of bankruptcies among people aged between 18 and 25 increased by 35.6 percent to 2,980.

The insolvency experts say that young people are often more vulnerable to bankruptcy as they have less experience of dealing with money, and are less likely to save.

Germans have massively increased their borrowing in the past decade - with total amount of private debt climbing from just over €500 million in 1999 to well over €6.2 billion in 2010. The number of bankruptcy cases jumped from 3,357 to 108,798 in the same period.

[LawsofPhysics]

Where is the "credit" going?  Capital mis-allocation or something else, anyone have some insight?

[Gypsyducks]

Got Rehypothecation?

[zebrasquid]

In a short while new Leaders will emerge that will run on the platform that everyone should just default on all debts...wipe it clean and start all over.
Kick over the chessboard. Musical chairs.. Civil disobedience...power to the people!

It will be official policy once these folks are elected.
Might as well borrow all you can in the meantime. Won't have to pay it back.

[Dr. Engali]

Okay what's up with the Lysteda add? I can say for certain that I have never googled, searched, or been to a web site for any information about "lighter bleeding during my period".......sorry just had to put that out there.

[Temporalist]

Holy shit did gold climb back!  That is some wall of (propagandist) worry it had to climb today and it went positive.

[firstdivision]

Since Credit is considered the smarter one, I'd say this is defo a risk on indicator.

[slewie the pi-rat]

all's not well that end's not well, BiCheZ!

[slewie the pi-rat]

now, with euro to vacation bed, we're seeing the bets getting cleared here

the shorts from last night on the stocks are taking their losses if they were greedy and didn't take profits or use short-stops

the fuking banksters who pounded downPMsRus are not payingPaul4robbingPeter and 1600U$D ain't gonna surpiZe, but daBoyz do know howta shakeDatTree

the fx profits have been cut in half and as ori mentioned yesterday, inflation is hitting india's poor very hard in the tummy;  another 0.8% today against the dollar;  this is fx inflation, imo

tyler: when i first darkened yer door you were writing about benocide due to QE relationary printing + exporting inflation

now, we see this happening thru QE_{^{ZIRPeppermintTwist}} thru the fx 'roidalism of the dollah as CTRL+P gets re-focused to maintaining political power rather than the illusions of growth, according to slewinomics at least

lQQk @ the y-0-y commodities indices in dollahZ: y-0-y bloomieChart  cue (inflation) is transitory...

countries which have weak currencies are screwed for the foreseeable future, especially since benzlebub may like the view right now just fiiiine~at least compared  to one of the very possible alternatives

you make hate him & timmah's fuking guts, but in slewienomics, they are fabulous banksters;  now, their commercial friends are in for some tought sledding, imo;  we're already seeing the cracks in veneer turn into just peeling veneer

more zombies on the horizon, but the cBs will make it thru if they don't blow their brains out, printing, which they seem to be controlling somewhat and using IOUs_target2 + conditions to behave, the latter of which has now joined the graveyard of un-post-modern ideas...

right about the time that the europeons grok that their entire monetary and fiscal system is based on paper backed by worthless IOUs and held together with scotch-taped and post-it IOUs_t-2 they will... ?

yep!  call a summit...  talk about a mortal lock!